Substance value method – useful as a supplementary component

The net asset value method is hardly ever used for the valuation of operating companies, except as a basis for determining the liquidation value of a company whose business operations are not to be continued. The reason why the net asset value method is not relevant for “living” companies is that no assets essential to operations can be sold without the business suffering or even collapsing completely.

The assets necessary for operations are a means to an end in order to generate income and cash flows. Therefore, you may only recognize income or cash flows for business valuation purposes, not add operating assets.

Exceptions to this are inventories that are above the level required for operations and machinery that is not used to generate the future sales and earnings. Real estate or properties that do not have to be held as business assets can also be valued separately.

The net asset value method makes sense as a supplementary component for the valuation of companies that have significant assets. These can be real estate companies, but also industrial companies with substantial fixed assets in machinery and equipment, as well as companies with very high inventories, such as specialist wholesalers or retailers.


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